Establishing a Loan Policy

Important elements of a good bank loan policy are as follows: 1. A clear mission statement for the bank's loan portfolio in terms of types, maturities, sizes, and quality of loans. 2. Specification of the lending authority given to each loan officer and loan committee (measuring the maximum amount and types of loan that each person and committee can approve and what signatures are required).

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3. Lines of responsibility in making assignments and reporting information within the loan department. 4. Operating procedures for soliciting, reviewing, evaluating, and making decisions on customer loan applications. 5. The required documentation that is to accompany each loan application and what must be kept in the bank's credit files (required financial statements, security agreements, etc.).

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6. Lines of authority within the bank, detailing who is responsible for maintaining and reviewing the bank's credit files. 7. Guidelines for taking, evaluating, and perfecting loan collateral. 8. A presentation of policies and procedures for setting loan interest rates and fees and the terms for repayment of loans. 9. A statement of quality standards applicable to all loans.

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10. A statement of the preferred upper limit for total loans outstanding (i.e., the maximum ratio of total loans to total assets allowed). 11. A description of the bank's principal trade area, from which most loans should come. 12. A discussion of the preferred procedures for detecting, analyzing, and working out problem loan situations. A loan policy is loan underwriting guidelines and the written documentation setting forth the standards as determined by the banks senior loan committee.

Principles of Lending
Safety Security Suitability Profitability Liquidity Integrity Adequacy of Finance Timeliness

Steps in the Lending Process

1. Loan requests: often arise from contacts the bank's loan officers and sales representatives make as they solicit new accounts from individuals and firms operating in the bank's market area. 2. Customers fill out a loan application. 3. An interview with a loan officer. Interview provides an opportunity for the bank's loan officer to assess the customer's character and sincerity of purpose.

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4. Site visits: If a business or mortgage loan is applied for, a site visit is usually made by an officer of the bank. 5. Credit References: The loan officer may contact other creditors who have previously loaned money to this customer for credit references. 6. Financial Statements and Documentation needed for Loan Evaluation, including: complete financial statements and, board of directors' resolutions authorizing the negotiation of a loan with the bank.

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7. Credit Analysis: The credit analysis is aimed determining whether the customer has sufficient cash flows and backup assets to repay the loan. 8. Perfecting the Banks Claims to Collateral: To ensure that the bank has immediate access to the collateral or can acquire title to the property involved if the loan agreement is defaulted. 9. Preparing a Loan Agreement: Once the loan and the proposed collateral are satisfied, the note and other documents that make up a loan agreement are prepared and are signed by all parties to the agreement.

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10. Loan Monitoring: The new agreement must be monitored continuously to ensure that the terms of the loan are being followed and that all required payments of principal and/or interest are being made as promised. For larger commercial credits, the loan officer will visit the customer's business periodically to check on the firm's progress and to see what other services the customer may need. Usually a loan officer or other staff member places information about a new loan customer in a computer file known as a bank customer profile. This file shows what bank services the customer is currently using and contains other information required by bank management to monitor a customer's progress and financial-service needs.

5Cs of Credit Analysis

Capacity Character Collateral Conditions Capital

Loan Proposal
It is a detailed report (based on a potential borrowers loan application and credit worthiness) presented usually by a banks officer (with his/her comments) to a senior loan officer or the banks loan committee.

Loan Proposal Submission

Information requirements from borrower Documents of creation of the entity, names, address, biodata and details of assets/liabilities, particulars of securities, details of borrowing arrangements, etc. Terms and Conditions for the credit facilities This is an important aspect in pre-sanction appraisal and post-sanction monitoring, as these need continuous compliance for the safety of an advance by a bank. There needs to be a complete agreement between the banker and the borrower w.r.t. terms and conditions on which the loan is being sanctioned so it helps the banks to keep the health of borrowal accounts good and risk of their lending to minimum.

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A check list Whether the appropriate loan application form is duly filled and signed; whether the proposal prepared on the appropriate proposal format and all the columns properly filled in; the balance sheet analysis by doing the ratio analysis is appropriate or not; if the proposed terms and conditions, are discussed with the borrower concerned; if the interest rate has been duly accounted for; why this account will not become a NPA; and if the relevant documents have been duly enclosed with the proposal.